Accounts Payable Best Practices

Mary S. Schaeffer

Executive EditorIOMA’s Report on Managing Accounts Payable

Co-creator The Accounts Payable Certification Programs

John Wiley & Sons, Inc.

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Accounts Payable Best Practices

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Accounts Payable Best Practices

Mary S. Schaeffer

Executive EditorIOMA’s Report on Managing Accounts Payable

Co-creator The Accounts Payable Certification Programs

John Wiley & Sons, Inc.

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This book is printed on acid-free paper.

Copyright © 2004 by Mary S. Schaeffer and the Institute of Management and Administration, New York, NY. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Cataloging-in-Publication Data:

Schaeffer, Mary S.Accounts payable best practices / Mary S. Schaeffer.

p. cm.“Published simultaneously in Canada.”Includes index.

ISBN 0-471-63695-9 (cloth : alk. paper)1. Accounts payable. I. Title.

HF5681.A27 S3 2004658.15′26—dc22

2003026689

Printed in the United States of America

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For my candle in the wind,my father,

Ron Schacht

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Contents

Introduction xi

Chapter 1 Invoices 1Invoice Handling: Approvals 1Forwarding Invoices 6Verifying Invoice Data 8Invoice-Coding Standards 11Short-Paying Invoices 16Paying Small-Dollar Invoices 19Handling Unidentified Invoices 21Handling Invoices without Invoice

Numbers 23Case Study: How One Pro Took Accounts

Payable Out of the Picture when Resolving Customer Discrepancies 25

Chapter 2 Checks 29Check Printing 29Check Signing 35Check Stock Storage 40Distribution of Checks 42Check Fraud 45

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Rush or Emergency Checks 50Case Study: Information Sheet:

Segregation of Duties 54

Chapter 3 Operational 57Duplicate Payment Avoidance 57Paying When the Original Invoice

Is Missing 61Limiting Calls to Accounts Payable 63Petty Cash 65Supplier Statements 69Case Study: Expert Demonstrates

How to Put the Web to Work for Accounts Payable 71

Chapter 4 Master Vendor File 77Master Vendor File Setup 77Using Naming Conventions 81Making Changes to the Master Vendor File 85Master Vendor File Cleanup 87Case Study: Experienced Accounts

Payable Pro Shares Master Vendor File Control Secrets 90

Chapter 5 P-Cards 97Design of the P-Card Program 97Establishing Procedures 99Setting Controls 101Increasing Usage 1051099s and P-Cards 106Terms 108Rebates 110Case Study: P-Cards Improve Accounts

Payable Process at PETsMART, Rock-Tenn, and Rouse 111

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Chapter 6 Travel and Entertainment 119Formal Policy 119Cash Advances 123T&E Report Form 125Verifying Data 127Handling Receipts 129Reservations 130Reimbursing Employees 132Unused Tickets 133Case Study: Making the Most of Direct

Deposit 134Case Study: TransUnion’s Successful

Low-Tech, Low-Budget T&E Solution 136Case Study: Follow IBM’s Lead: 21

Steps to an Award-Winning T&E Process 139

Case Study: How Zurich America Developed Its Own Electronic T&E Report 145

Chapter 7 Regulatory Issues 1511099s 151Sales and Use Tax 154Unclaimed Property 156Case Study: How to Avoid Sales

and Use Tax Audit Disasters 159Case Study: A Typical Company’s Unclaimed

Property Experience 162

Chapter 8 Cash Management 167Taking Early Payment Discounts 167Payment Status Information for Vendors 170Bank Accounts and Fraud 172Other Cash Management–Related

Initiatives 174

Contents

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Case Study: General Electric’s Approach to Electronic Invoicing and Payment Processing 176

Chapter 9 Technology 181Imaging and Workflow 181The Internet 185E-Invoicing 187Case Study: PPL Electric Offers Lessons

on Setting Up an Accounts Payable Imaging Solution 189

Case Study: An Accounts Payable Web Site 194

Case Study: How the Accounts Payable Manager at Merck Overhauled Department Procedures and Technology 199

Chapter 10 Communications/Customer Relations 209Payment Status Information for Vendors 209Communicating Relevant Information

to Vendors 211Communicating with Internal Customers 214Improving the Procure-to-Pay Cycle 217Case Study: Interactive Voice Response

Frees Accounts Payable from Annoying“Where’s My Money” Calls 219

Case Study: How Automated Accounts Payable and Purchasing Systems Mesh at BNSF 222

Index 229

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Introduction

Companies should be interested in implementing best prac-tices in their accounts payable (AP) operations for the samereason that Willy Sutton focused on banks—it’s where themoney is. The fundamental structure of the AP function isthat it is about a company’s financial integrity. Those who dis-regard their AP operations will adversely affect their bottomline, either directly by

• Paying invoices more than once• Paying charges that should have been borne by the sup-

plier• Failing to take advantage of special pricing arrange-

ments• Not taking earned discounts• Being fined by states for failing to comply with escheat

or sales and tax rules

or indirectly through

• Increased transactional costs• Increased costs to resolve discrepancies• Increased costs to fix errors• Increased costs by failing to take advantage of new

processes and technologies• Failing to earn early payment discounts

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OVERVIEW: FACTORS

The AP function has changed radically over the last 10 years,and it appears that the transformation will continue at leastfor the foreseeable future. The following are some of the fac-tors affecting this transformation:

• Check fraud had reached levels that demanded not onlya change in the way companies write checks but also thetechnology used to limit the scams.

• Companies looking for ways to keep costs under controlhave cut AP staffs to the bone.

• Technology has made a big dent in the amount of re-sources companies now need to allocate to transactionalwork.

• The concentration in a growing number of accountspayable operations is shifting from transactional pro-cessing to an analytical focus.

• The overall number of people working in AP is declin-ing. That decrease is almost entirely in the clerical staff.Consequently, the professional level of these depart-ments is rising.

• States, desperate for ways to increase their coffers with-out alienating the voters, have found companies failingto comply with unclaimed property and sales and usetax rules to be just the answer to their problems. Theyare aggressively pursuing them and, when they findthem in noncompliance, auditing and fining them un-compromisingly. States now use third-party auditors inmany cases. They also work together.

• The accounting scandals and the enactment of the Sar-banes-Oxley Act have raised the level of inspection atmany companies, both private and public.

• The Internet

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BEST PRACTICE PRINCIPLES

With reduced resources and increased scrutiny, implementingbest practices in AP is more crucial than ever. Strictly focusingon cost is apt to get a company into trouble. While keepingcosts down is a good idea, it is important not to let that be theonly consideration. It is important that sufficient thought alsobe given to adequate controls, fraud prevention, and goodvendor relationships.

To that end, in defining best practices, the following over-riding principles will govern:

• Up-front controls• A move toward minimizing paper• Clear and easily traceable audit trails• Minimal clerical data entry• Transactional efficiency

This should translate into lower costs, in most instances.

BEST PRACTICES IN A THEORETICAL BEST PRACTICE COMPANY

If it were possible to select best practices simply on the basisof what’s best and not taking into account corporate culture,existing procedures, financial limitations, and unique corpo-rate procedures, here’s what the list might look like:

• Implement e-invoicing for all invoicing.• Use positive pay.• Insist that all purchase orders be completely filled out

before they are issued, and that Receiving completelycheck packing slips.

• Use workflow to route invoices for reviews with an esca-lating approval structure.

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• Have travel and entertainment (T&E) reports com-pleted electronically; spot check rather than completelyreview each report; and make all employee reimburse-ments using direct deposit.

• Comply with all escheat and sales and use tax regula-tions.

• Make every payment possible electronically.• Encourage all employees to be paid via direct deposit.• Take advantage of all early payment discounts, but don’t

make any payments before the due date.• Provide adequate resources for employee continuing

education opportunities.

IMPLEMENTING BEST ACCOUNTS PAYABLE PRACTICE POLICIES

While the rest of this book examines AP functions in detailand spells out the best practices for each, this section will lookat some overall best practice policies:

• Minimize or eliminate low-dollar invoices. This can bedone through a variety of techniques, including:� Use of purchase cards (p-cards)� Making payments to certain vendors from statements

rather than invoices� E-invoicing

• Institute strong up-front controls, eliminating the mostback-end approval processes:� Completely filled-out purchase orders� Evaluated receipt settlement� Negative assurance

• Get rid of as much paper as possible using:� Imaging

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� E-invoicing� A firm policy regarding where invoices should be sent

first� P-cards

• Consider outsourcing specialty functions, including:� Sales and use tax� Escheat� Duplicate payment audits� Value-added tax reclaim� Telecom and freight payment and audits

• Make as many payments as possible electronically, using:� Direct deposit� Automated clearinghouse credits and, where appro-

priate, debits• Limit the number of phone calls coming into AP by:

� Using online dispute resolution� Updating payment status on the Internet� Updating payment status using interactive voice re-

sponse (IVR)� Publicizing payment timetables� Including an explanation slip with all short payments

• Don’t forget the value employees bring to the AP func-tion:� Motivate staff� Focus on morale� Allocate some resources for staff education

A WORD ABOUT BEST PRACTICES

It’s fine to talk about best practices in a theoretical sense, butprofessionals who toil in the field know that sometimes whatworks in theory will not work in their organization. Some-

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times industry peculiarities stand in the way, and other timesit might be the corporate culture or practices in another de-partment. If the receiving dock does not do a good job atchecking packing slips, it is pointless to implement a processthat relies on accurate information from Receiving.

Thus, in this book, you will see discussions of best prac-tices as well as what we refer to as “almost best practices.”These take into account that not all practices will work at allcompanies and offer an alternative to those who cannot im-plement the absolutely best practices.

We also include a discussion of those practices that defi-nitely should not be used but, as many reading this knowfrom painful experience, are in use in parts of CorporateAmerica. Hopefully, by seeing these practices identified inprint, some will decide to replace them in their own organiza-tions.

WHAT’S INSIDE

The book starts at the beginning, reviewing the way invoicesare processed. It identifies a number of potential problem ar-eas and then offers best practice solutions. Some of the itemsmay seem mundane to those not intimately familiar with AP.However, if they are ignored, expect duplicate payments andperhaps even fraud to increase.

At least for the present, as most AP departments have notmade the leap to 100 percent electronic payments, checksdominate the payment landscape. If all aspects of this func-tion are not handled properly, check fraud, duplicate pay-ments, and processing costs will all increase. Also, the com-pany may put itself in the position of being completely liablefor any check fraud that does occur.

The mundane operational aspects of AP are reviewed in away that focuses attention on issues that are sometimes ig-nored. A complete chapter follows this on one of the most im-

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portant, yet overlooked aspects of the purchase-to-pay cycle—the master vendor file. You would be surprised how often themaster vendor file is not even an issue on the table—with dis-astrous consequences. With the renewed interest in internalaudit and controls, thanks to the Sarbanes-Oxley Act, compa-nies disregard their master vendor file at their own peril.

P-cards are one of the easiest innovations to understand,and companies everywhere are adopting them. The potentialfor growth in this area is staggering. Thus, it is imperative thatthose who use them do so correctly. The cost and time savingswill be maximized if best practices are implemented from thebeginning.

T&E is an area that has changed dramatically in the lastdecade. Online filing, the increased use of T&E cards, andother electronic initiatives have changed the way most of cor-porate America handles their T&E function. The chapter onT&E reveals some of the techniques used at innovative com-panies.

While few people think of AP and regulatory issues in thesame breath, there are a few issues that, if not handled cor-rectly, can bring trouble to a company. Specifically, in thischapter we take a look at 1099 reporting, sales and use taxhandling and reporting, and unclaimed property, also calledescheat. It is the last two areas, sometimes ignored by compa-nies, that are drawing increased attention from the states.

As the AP function becomes more analytical, it is in-evitable that companies begin to expect that the professionalswho run AP take a cash management approach to the func-tion. In some ways, paying too early is just as bad as paying toolate. This chapter takes a look at some of the cash manage-ment initiatives that are increasingly falling on the shouldersof the AP department.

Although in many cases, AP was one of the last groupswithin some companies to get computers, they are making upfor it in a big way today. Technology is making inroads into

Introduction

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the department in an extraordinary manner. This chaptershares some of those innovations. We expect this area to con-tinue to expand, especially as AP takes the lead in pushing forelectronic invoicing and a move to electronic payments—away from the check standard.

Finally, successful AP departments are starting to realizethat they have customers—both internal and external. Byfinding ways to deal with both, they are also improving vendorrelationships. Those that do not make this leap can hurt thevendor relationship and increase costs as poor communica-tions with other departments run up the dispute resolutionbill.

Upon looking back at the items covered, it is truly amaz-ing how much AP has changed in the last 5 to 10 years. Thisbook attempts to identify the best practices that will makeyour AP department first rate.

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1

Invoices

Invoices can present a real challenge to the payment func-tion. If any of the aspects are not handled correctly, the pay-ment process bogs down. In this chapter, we’ll look at

� Invoice handling: approvals� Forwarding invoices� Verifying invoice data� Invoice-coding standards� Short-paying invoices� Paying small-dollar invoices� Handling unidentified invoices� Handling invoices without invoice numbers

INVOICE HANDLING: APPROVALS

Background

As most reading this are well aware, Accounts Payable (AP)does a three-way match before paying an invoice. This entailsmatching the

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� Purchase order (PO)� Invoice� Packing slip

In theory, if all POs are filled out completely and correctly, ifreceiving thoroughly checks all packing slips, and vendors cre-ate accurate invoices, the AP department should be able to paythe invoice without input from any other party. However, fewcompanies are at this point. Even at those companies in whichthe documentation is good, management often demands thatthe original purchaser get involved and approve the invoicefor payment. Part of the reasoning for this is that often POsare not completely filled out and special pricing or paymentdeals are not reflected on the PO. Unfortunately, the pur-chaser who neglects to include special terms on the PO is justas likely to forget about them when the invoice shows up.

With no formal policy governing where invoices are sent,first invoices sometimes float around the corporation, layingthe groundwork for all sorts of poor practices. For starters,the invoice often fails to arrive in any location that couldprocess it before the end of the early discount period. Addi-tionally, it provides cover for those approvers who tend to letthe invoice lie on their desk for weeks without taking action.Then, when the supplier is threatening to put the companyon credit hold, these individuals deceitfully claim that they“sent that invoice down to Accounts Payable for processingweeks ago.”

Recent innovations in the area of electronic invoicing arerapidly changing the way we think about invoices. This is re-flected in some of the following recommendations.

Best Practices

At most companies, only certain people can approve invoicesfor payment. Most companies limit this ability by rank, job re-

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sponsibility, type of purchase, and sometimes even the dollaramount. In the best of circumstances, the board of directorsshould have given these approvers authority, and AP shouldhave copies of these board authorizations.

Copies of the list, if it exists in paper format, should begiven only to those who need it, and in all cases should befiled away carefully. The list should not be hung on the wallfor easy reference or left lying on a desk where anyone walk-ing by could see it and easily make a copy. When the list is up-dated, as it periodically will be, old copies of the list should bedestroyed.

If you want to be super careful, new copies of the listshould only be exchanged for the old ones, and all the oldones can be destroyed together.

The fact that an invoice arrives in Accounts Payable with asenior executive’s signature on it does not mean that the se-nior executive actually approved the invoice. To protect theAP staff, the department should have signature cards contain-ing the actual signature of anyone authorized to approve in-voices. It should be the executive’s real signature, the one heor she uses every day, and not the Sunday-school signature.More than one executive has taken the time to sign a signa-ture card carefully, when in actuality everything else has an il-legible scrawl on it. In these cases, the signature card shouldhave the illegible scrawl as well, or the AP associate might sus-pect fraud when the signature cards are checked.

We are not suggesting that these cards be checked forevery invoice that shows up. However, spot checking once in awhile is not a bad idea. And, obviously, if a suspicious-lookingsignature arrives on an invoice, the signature cards should bechecked immediately.

Ideally, invoices will arrive electronically. Admittedly, to-day, only a small portion of invoices is received electronically,but that number is growing by leaps and bounds. When an in-voice is received electronically, it should be forwarded to AP

Invoices

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for processing. Using workflow, the AP department can for-ward the invoice for approval to the appropriate approver.This is based on information provided on the invoice inte-grated with the approver list discussed earlier.

Companies should include in their workflow programmingan escalating approval feature. What this means is that if thefirst approver does not respond within a given time frame, sayfive days, the invoice is automatically routed to the next higherapprover in that chain of command. This not only takes careof tardy approvers, but also vacations and unexpected ab-sences. It simultaneously creates an audit trail for everyone tosee. No longer can Purchasing claim it sent an invoice back toAP when it is still in the department. Finally, the audit trail fea-ture combined with escalating approvals make it far less likelythat managers will relegate invoice approval to the bottom oftheir workload—especially when not approving invoices mayactually create more work for their immediate supervisors.

When companies receive paper invoices, as virtually everycompany does, the invoices should be directed to AP ratherthan the individual purchasers. This allows AP to log the in-voice in and forward it to the appropriate approver. It helps geta handle on the voluminous paper that can spread throughouta company without any boundaries. Ideally, when all invoicesare directed to AP, they can then be scanned and forwarded, asdescribed above, for approvals. Even if the intricate workflowprogramming is not feasible, there is still some audit trail andthe number of lost invoices is greatly reduced. The invoicenever leaves AP, and thus the “opportunity” to get lost on some-one’s desk or in the mail is diminished. In order to make sucha process work efficiently, vendors should be directed to in-clude the name of the purchaser on all invoices. Companiesthat make this process work the best are those that send in-voices without the purchaser’s name back to the vendor.

Having all invoices come first to AP also introduces an-other control against employee fraud. Invoices cannot be al-

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tered, nor can they show up out of the blue with what lookslike an executive’s signature on them. By scanning the in-voices and forwarding them for approval, it makes it all theharder for a scheming employee to forge a boss’s signature.

Almost Best Practices

In the absence of board authorizations, AP should have a listof who can approve what purchases. A high-level executive atthe company should sign off on this list. Otherwise, it is ex-ceedingly easy to have fraud, and AP could end up taking ona responsibility it should not.

If it is not possible to get imaging—even an inexpensivemodel—in AP, a policy still should be set up for receiving in-voices. If all the invoices come to AP first, it will be necessaryto set up a log to track which invoices were received, their duedates, and whom they were sent to for approvals. This can bea tedious and time-consuming, paper-intensive process—ascopies should be made of the invoices before they are sentout for approval.

Having the invoices come first to AP helps with the possi-ble employee fraud issue discussed earlier.

Reality Check for Accounts Payable

While sending invoices lacking the purchaser’s name back tosuppliers may lead to a smoother AP operation, not all manage-ment teams are going to think this is a great idea—especially ifkey suppliers balk or complain. Thus, it might be a good ideato get management on board before instituting this policy.

Worst Practices

Worst practices include

� Having no policy regarding where invoices should besent for payment

Invoices

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� Not having a list of authorized approvers� Allowing anyone to submit invoices for payment.

FORWARDING INVOICES

Background

On the face of it, it would seem that where invoices weremailed should have little impact on the payment function.Unfortunately, this is not the case. In a typical company withno invoice forwarding policy, invoices that are addressed tothe company but not a particular individual can float forweeks from desk to desk before eventually ending up in AP oron the desk of the purchaser. When invoices are not properlyrouted,

� Any chance of earning an early payment discount is lost.� Duplicate payments can occur when a second invoice is

sent.� Late fees can occur.� Vendor relations are weakened.

Best Practices

Companies need to have a firm policy regarding where in-voices should be sent. This can be one of two places:

1. The AP department2. The original purchaser

Either way works just as long as there is consistency in the ap-proach. There is a slight advantage of directing all invoices toAP. When the invoices are sent directly to AP, a best practice isto insist that the purchaser’s name be included on the invoiceso the AP staff knows where to forward the invoice for ap-proval. Some companies adhere to this approach, strictly re-

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